The massive measures taken by the RBI are amounted to liquidity injection of Rs 3.47 lakh crore or 3.2 percent of GDP which have multiplier impact on the economy and in fact were much ahead of Street expectations.
The Reserve Bank of India on March 27 used the majority of conventional methods to fight COVID-19-led economic issues. Experts called it a comprehensive bazooka by RBI which was more than expectations.
In its preponed monetary policy committee meeting (March 24-27 versus March 31-April 3 earlier), the RBI cut the repo rate, at which banks borrow from the central bank, by 75 basis points to 4.4 percent against 5.15 percent earlier.
“While there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points,” said the apex bank.
The RBI also slashed cash reserve ratio, which every bank has to keep that much percentage of cash in reserves against its total deposits, by 100 basis points to 3 percent.
“RBI, very correctly so, announced a comprehensive bazooka covering all aspects of the economy by taking measures system-wide both through liquidity, rates and regulatory forbearance (retail as well as for industry) and also targeted measures to manage the corporate bond markets,” Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank told Moneycontrol.
She said the measures should help in tiding through the end of the year issues which many banks/institutions were fearing and would go a long way in cushioning the dislocations in various markets.
Joseph Thomas, Head of Research – Emkay Wealth Management also said the RBI announcement was inclusive of all the possible actions from a monetary policy perspective, like the rate action to bring down policy rates directly, liquidity action to support effective transmission of lower rates to ultimate users of credit, and a number of regulatory and developmental measures.
It meant the measures have addressed all the fundamental issues in a comprehensive manner using both conventional measures like cut in the repo rate to the tune of 75 bps and the CRR cut of 100 bps, and also substantial liquidity measures, apart from actions like access to domestic banks in offshore currency NDFs, he added.
After extensive discussions for three days, the Monetary Policy Committee today voted unanimously for a sizeable reduction in the policy repo rate and for maintaining the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, while ensuring that inflation remains within the target.
The Reserve Bank assured that it is at work and in mission mode, monitoring the evolving financial market and macro-economic conditions; and calibrating its operations to meet any need for additional liquidity support as well as other measures, as may be warranted.
RBI also acted well ahead to support corporates, saying all commercial banks, co-operative banks, all-India financial institutions, and NBFCs are being permitted to allow a moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020.
“The relief given on the repayments in term loans is indeed a very timely action and would serve to remove lot of stress which a large number of borrowers may face in the coming days. This is a direct and targeted approach to the fluid situation in the face of an uncertain inflation and growth trajectory,” Joseph Thomas said.
The massive measures taken by the RBI amount to liquidity injection of Rs 3.47 lakh crore or 3.2 percent of GDP which have a multiplier impact on the economy and in fact were much ahead of Street expectations.
“Total liquidity injection along with measures announced earlier would amount to Rs 3,70,000 crore, which is 3.2 percent of GDP. The 3-month moratorium on term loans is a great relief to borrowers,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.
“The combination of measures to boost liquidity, improve monetary transmission and relax repayment pressures will act with force multiplier in the economy. RBI has done a great job,” he added.
As the RBI Governor, Shaktikanta Das said, “tough times don’t last, but tough institutions do.”
RBI has shown that it is tough, Vijayakumar said.
Experts feel the Reserve Bank also hinted that it could consider unconventional measures if needed, and another around 50bp cut in repo rate could be seen as the RBI maintained accomodative stance.
“The governor has also hinted about using unconventional methods if needed. In the present scenario, considering the weak sentiments in the economy, the effectiveness of monetary stimulus will be limited,” Deepthi Mary Mathew, Economist at Geojit Financial Services said.
Upasna Bhardwaj expects additional scope for 40-50bps of rate cut with any further easing and extension of measures depending on the nature of spread of COVID-19.
Earlier this week, Prime Minister announced nationwide lockdown of 21-day to control the spread of novel coronavirus that has taken 13 lives with over 700 infected cases in India so far.
The lockdown actually hit daily wage workers and poor the most compared to others. Hence, Finance Minister Nirmala Sitharaman on March 26 announced a Rs 1.7 lakh crore economic relief package under a ‘Prime Minister Gareeb Kalyan Scheme’, aiming to protect the poor from the ongoing COVID-19 crisis.
The scheme would entail both cash transfer and food security. PM Garib Kalyan Anna Yojana will cover around 80 crore poor people while direct cash transfer would include farmers, MNREGA, poor widows, pensioners and divyaang, women (with Jan Dhan Yojana, covered by Ujwala scheme, in self-help groups covered by livelihood missions), organized sector workers (registered with EPFO), construction workers and those under district mineral fund coverage.
“What makes this slowdown unique is that the policymakers’ intervention – monetary or fiscally – will be broadly ineffective in addressing the economic effects unless the COVID-19 forces subside naturally. The longer it takes for the situation to normalize, the more anxiety will lead to profound actions from the policymakers,” said Motilal Oswal.
The FM had earlier announced several measures to ease the regulatory and compliance burden for taxpayers.
Globally also central banks already announced liquidty measures along with interest rate cut in the range of 25-50bps including recent US move, where Senate members cleared $2 trillion coronavirus economic relief package.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.